Here's Why Restaurants Set the Prices You See

Dining out isn’t just about the food, it’s about the experience. Hospitable service, beautifully plated dishes and creative menu items keep diners coming to restaurants time after time. Restaurant regulars frequent their favorite eateries not just for the food, but also for the homey atmosphere they provide and the feeling of being taken care of. This experience, however, comes with a price.

Some may be hesitant to dine at restaurants, knowing that their meal will cost much more than if they were to make the same dish at home. But they’re not just paying for the food: menu prices reflect a multitude of expenses that go into creating that treasured dining experience we all enjoy. So let’s break down why dining out is more expensive than eating at home, but often well worth the money.

Every restaurant is different and thus has different operating costs, but they can generally be grouped into four major categories: labor costs, food costs, fixed costs, and profit. We’ll take a deeper look into each of them.

Labor is one of the largest expenses that restaurants have to stomach. In fact, the cost of labor typically eats up about 30% of a restaurant’s total revenue, and vary depending on the type of establishment. For example, a white tablecloth, full service restaurant will likely have a higher labor cost percentage than a smaller, casual dining cafe. Typically, a fast casual eatery pays about 29.4% of their revenue in labor, whereas a slightly more upscale casual eatery averages 33.2%, according to 7Shifts.

The sheer amount of personnel needed to run a restaurant explains why labor expenses are so large. Payroll at a typical full-service restaurant often includes hostesses, buspersons, servers, bartenders and barbacks, janitors, managers and general managers. That’s just the front of the house. Don’t forget about all the people that are actually making the food, an extensive back-of-house team of prep cooks, dishwashers, sous chefs and the executive chef.

Labor costs cover not just general wages, but also necessary expenditures such as overtime, payroll taxes, sick days and healthcare benefits for the restaurant’s staff and management., And labor costs keep going up: new minimum wage laws have caused a steady uptick in restaurant labor costs in recent years, says FSR Magazine.

Although labor costs are a substantial portion of any restaurant’s budget, service is one of its most indispensible aspects of eating out. Service and hospitality are crucial in ensuring that each diner has a positive experience from the moment they enter the door up to the moment they exit. Good restaurant hospitality sets the eatery apart from the rest, and keeps customers returning time and time again.

Fixed costs are any expenses that a restaurant makes each month, regardless of how many customers they serve or how much food they make. For example, a cafe would have to pay their rent whether they sell 10 or or 10,000 lattes, and a bar would need to pay their utility bills no matter how many employees they hired or fired that month. Fixed costs cover expenses such as rent, utilities, license fees (such as liquor licenses) and insurance premiums. As a whole, fixed costs take up about 30% of a restaurant’s revenue.

A restaurant’s size, location and scale can significantly affect their fixed costs. A restaurant in New York City, for example, would pay much more in rent than a similar-size restaurant in a less metropolitan area. A larger restaurant would need to pay more for their electricity, and a restaurant in Chicago would need to pay higher heating bills than one in Southern California.

Many of these fixed costs are more “hidden” to clients, since you likely wouldn’t be thinking about electricity and heating bills during your Saturday night dinner. Nonetheless, they are a major part of what you’re paying for when you go to your favorite restaurant.

Of course, when you pay your tab at a restaurant, you’re also paying for the costs of the actual ingredients that go into your meal. On average, food costs take up anywhere from 25% to 35% of a restaurant’s total revenue.

Restaurants generally calculate their total food costs by totaling two factors: plate cost and period cost. Plate cost determines what a restaurant spends to make any given dish by adding the cost of each individual ingredient. Period cost is the total amount of money that a restaurant spends on food during any given week, month, quarter, etc.

Like labor costs, food costs have also increased in recent years. From 2016 to 2019, food costs have increased by about 7%, which may be explained by rising demand for more organic, healthy and local ingredients that often cost more, says FSR Magazine. Because the cost of food accounts for a significant chunk of a restaurant’s budget, many establishments aim to control such costs through buying seasonal ingredients, minimizing food waste and limiting portion sizes.

After a restaurant pays their expenses for labor, food, and fixed costs, they are left with their profit. Shockingly, a successful restaurant typically only takes in about 10% of their revenue as profit after accounting for all the costs listed above. Even more surprising is that 10% is a generous estimate by most accounts. Upserve Restaurant Insider calculates that on average, restaurants only make a 6% profit margin.

Given the high costs and low profit margins in the restaurant business, it’s no surprise that maintaining a restaurant is incredibly difficult, with many restaurants going under not long after opening. In fact, a whopping 60% of restaurants don’t make it past their first year, and 80% of them fold after five years. The restaurant industry is becoming even more difficult for owners to make a living, with labor, wages and food costs both steadily increasing says The Takeout.

Factor in the COVID-19 crisis, restaurants are being hit harder than ever. Since March 1, 2020, it has been reported that 53% of restaurants on Yelp have permanently closed. So next time you wonder if dining out is worth it, just remember that your patronage goes far beyond what is on your plate. Although eating out can be pricier than dining at home, the experience that you may have and the support that you’re providing is truly priceless.

If you have restaurants in your community that you love, now is the time to show your support! One of the simplest ways to do so is by booking a food tour with TastePro, which allows you to support multiple restaurants in one visit.

Dine at multiple restaurants over the course of a single meal, where you'll enjoy exclusive tasting menus of signature dishes at each place. Flexible arrival times, tax and tip included with every booking and drink specials up to 60% off standard menu prices are just a few ways we transform ordinary meals into Phenomenal Dining Experiences. 

Whether you're visiting a new place or exploring your own backyard, TastePro is The Best Way to Try New Restaurants. Book your walkable, self-guided food tour today at GoTastePro.com

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